- This topic has 8 replies, 2 voices, and was last updated 1 month ago by
.
- Posts
“A company has an asset beta of 1.25 and a debt beta of 0.20. The market value of the company’s equity is $150m and the market value of its debt is $50m. The market premium is 8% and the risk-free rate is 6%. The tax rate is 30%.
What is the company’s cost of equity (to one decimal place of a percentage)?”
Why is the equity beta 1.495?
Where is this question from?
Is it this one?
A company has an asset beta of 1.25 and a debt beta of 0.20. The market value of the company’s equity is $150m and the market value of its debt is $50m. The market premium is 8% and the risk-free rate is 6%. The tax rate is 30%.
What is the company’s cost of equity (to one decimal place of a percentage)?
A.18.0%
B.9.0%
C.16.0%
D.8.5%Ba = Be * E/E + D1-t
1.25 = Be * 3/(3+.7)
1.25 = Be * 3/3.7
1.25 = Be * 0.8108
Be = 1.54 approx
So 6 +( 8 ) * 1.54 = 18% approximately
Hi, you worked out the question I’m referring to. Where did the three come from? And what is the first formula you showed?
This is the working on the study hub.
1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20
?e = 1.495
(I sent the previous question multiple times by accident.)
The 3 and 1 are just proportions of Equity and Debt
That is how I do beta equity and beta asset1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20
?e = 1.495
This considers the debt beta, which I missed
1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20
This is the complete working from the study hub.
1.25 = (150/(150 + 35)) × ?e + (35/185) × 0.20
?e = 1.495
Use CAPM to find the cost of equity as 6% + (1.495 × 8%) = 17.96% i.e. 18.0% to one decimal place of a percentage.
- You must be logged in to reply to this topic.